Front Fee

We love options, but do you know what we love even more than options? Options on options.

When our friend buys two shirts for a party, we buy four, so we can choose our outfit based on what he wears. When we plan a vacation, we book two fully refundable trips just in case the weather is bad in one place and we decide to go to the other. And when we invest, you can bet your beard that we’re all about the compound options.

Compound options are great because they are, quite literally, options on options. In other words, we’re buying the right—but not the obligation—to buy or sell stock at a later date based on predetermined parameters. Options, baby. And all we have to do to get started is decide which shares we want and how many, select our expiration dates and strike prices, and pay the front fee. The front fee is basically the premium we pay for the right—nay, the joy—of stepping into the compound option world.

Unfortunately, that joyful little front fee is probably not the only fee we’ll pay here. It really only covers the first half of our compound option: the “right to do this” part. The second part, the actual exercising of the option, also involves a premium, and that’s called (surprise!) the back fee. The moral of the story is that compound options can be a little expensive (kind of like buying four shirts for one party), but they do give us more leverage with our investments. And, of course, they give us options.